What Are the Qualities That Make a Good Financial Forecast?
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90% of startups fail.
How do you avoid becoming part of this statistic? By creating a forecast.
A good financial forecast leads to more confident business decisions and faster growth. But what if you’re unsure about the quality of your forecast?
How can you possibly be confident using it?
Let’s remove your uncertainty and show you what it means to have a good forecast.
Key Takeaways
A good forecast:
- Is realistic
- Helps you explore your business
- Is up-to-date
- Detailed but not perfect
1. It accurately reflects your business
A reliable financial forecast starts with accurate and up-to-date data that reflects your current financial standing.
For established businesses, use your latest accounting statements as a starting point.
If you’re new and lack this historical data— start with industry benchmarks. These are industry standards or guidelines for key financial metrics. After getting real-world data, you can compare your forecast to those benchmarks. How does your forecast compare to industry standards? If your numbers are close to the average benchmarks, then you probably have a pretty decent forecast. LivePlan makes this step easy by including industry benchmark data for you.
Note: Pulling from industry benchmarks or your own historical data will give you the best shot at an accurate forecast upfront. This will help you down the line when you compare your forecast to your actual results to better understand the financial health of your business.
2. Specific but simple to review
To be effective, a financial forecast must provide a detailed view of your business operations and cash flow. Segmenting revenue, expenses, direct costs, personnel, and other financial elements allows for more insightful analysis.
But it is crucial to strike a balance between granularity and simplicity. You want to avoid getting overwhelmed by excessive data. This could look like:
- Bucketing similar revenue and expenses
- Forecast sales, personnel, and cash separately
Be sure to provide enough information to create a quality forecast that is lean enough to remain clear. As time goes on, you should update and revise your forecast as you learn more about your business.
3. A grounded and realistic baseline
Avoid being overly optimistic when creating your baseline forecast– investors hate the hockey stick growth graph as a visual sticking point. It is better to have a conservative estimate and work towards exceeding expectations.
Light online industry research can help validate your price and cost assumptions. This, along with your use of historical data, will ensure a more realistic foundation for your forecast.
4. There’s room to explore
A good financial forecast encourages exploration. Forecasts can’t predict the future, but they help you prepare for it by considering various scenarios beyond the expected result. This includes (but is not limited to):
- Best and worst-case scenarios
- Rapid scale-up
- Lease versus buy decisions
By contemplating different scenarios, you can better prepare your business for unexpected challenges or opportunities.
- What would it look like if you decided to expand your business?
- How do the options of leasing versus buying a property affect your potential outcomes?
Use your expected forecast as the starting point for these questions.
5. Your forecast is ready
A financial forecast typically includes your balance sheet, income statement (P&L), and cash flow statement. While individual elements may be forecasted separately, the true value lies in the ability to examine them together. You have all the pieces, they’re filled out and organized, but your forecast is really ready when you can make all of these parts work together. Tools like LivePlan allow you to see this all mapped out in one place. Your forecast won’t predict the future, but a complete forecast will prepare your business for different possibilities that could happen.
This presents a cohesive story about your business’s financial health.
6. Updating is quick
Forecasting is meant to benefit your business– not hinder it.
Entrepreneurs often view financial forecasting as a complex challenge, but it’s a vital tool to empower your business. The key is to start with simple, relevant data that reflects your business’s essence.
The magic happens when forecasts evolve with your business, adapting to real-life data. Regular check-ins serve as your compass, guiding your trajectory and ensuring alignment with budget and sales projections.
How often should you review? Set a rhythm that suits you – monthly, quarterly, or with changing seasons.
LivePlan makes this easy. By integrating your accounting data—it updates your forecasts with the push of a button. And with its customizable dashboard, you can focus on information that’s vital to your business.
To put you at ease, know that forecasting isn’t insurmountable. Embrace regular reviews and tools like LivePlan to navigate this terrain and fuel your business growth. Taking these steps from the beginning will help you stay on top of your business and on track for success.
7. It’s not perfect
Forecasting is not about perfectly predicting the future.
Deviations between your forecast and actual performance provide valuable insights. They highlight where assumptions need to be adjusted or where your business performed better than expected. Embracing multiple scenarios allows you to be better prepared for any outcome and reduces the stress of trying to be 100% accurate.
However, your accounting needs to be spot on. This is your current financial data that informs the forecast. If it’s wrong, your forecast will be so far from reality that it’s practically useless.
From there, make assumptions, look at performance, and create predictions. Your forecast will be a useful tool for your business because it helps you budget, set goals, and determine an accurate financial trajectory for your business.
Looking forward
Forecasting for the future may seem daunting, but now you know what a good forecast looks like.
You will get value from your forecast as long as you are:
- Providing accurate accounting data
- Reviewing and updating on a monthly basis
- Considering multiple scenarios
Remember that your business is constantly changing, and you want your forecast to reflect that. It will never be perfect– it’s not supposed to be. A good forecast is one that is usable for your business and accurately reflects your operations and performance. It is not a 100% accurate prediction of the future.
So, if you’re worried about getting things wrong, then forecasting is for you. It’s going to be wrong, and that’s okay– it will help you better understand your business and make strategic decisions.
Fortunately, you don’t have to do this on your own. LivePlan makes it easy for you to create, review, and update forecasts. No spreadsheets or complex formulas required.
Try LivePlan risk-free and become more confident in your ability to forecast. Your business will be better for it.
